Tesla thinks sales could be electric, if only New York would cooperate

This is a defining moment for Tesla and its star chief executive, Elon Musk. The Palo Alto, Calif.–based company is delivering its first midprice car, the Model 3, as of July 28. The long-awaited vehicle generated close to 400,000 orders with virtually no advertising, but sales could fall short of their potential in New York because the maker of electric automobiles can sell its cars at only five outlets statewide.

The reason would baffle most consumers: State law requires cars to be sold to consumers by dealerships, not by manufacturers—as Tesla does exclusively. Its five state stores are legal because the company reached a compromise with franchised car dealerships and lawmakers in 2014. Without that legislation, Tesla could have been forced to close stores it began opening in 2009, including a small outlet in Chelsea and a sales and service shop in Red Hook, Brooklyn.

"If we're going to be successful in New York, it's going to be driven to a large degree by how well we can penetrate the market," said Diarmuid O'Connell, vice president of business development, during a June conference call. "We sell fewer vehicles in New York than we could or should sell because of this unnatural cap. There's a huge appetite for this technology [in New York]."

Far more than Tesla's previous models, which sell in the $70,000 to $80,000 range, the $35,000 Model 3 sedan could appeal to the upstate market, the executive said. But the company hopes to expand downstate as well.

"If we can lift the cap on locations, we would invest more fully in Manhattan," he added. "Right now we're stuck with one location." More than 6,000 of the company's 100,000-plus vehicles are on the road in New York, which recently began offering electric-car purchasers a tax credit worth up to $2,000.

Focal points

Name Tesla Inc. (changed from Tesla Motors in February)

Industry Electric cars

Founded 2003

Location The Silicon Valley–based company has a store in Chelsea and one in Red Hook, Brooklyn, which eventually will house corporate operations. It will soon move its Chelsea store to the Meatpacking District.

Revenue $7 billion

Growth rate 73%

Profit Lost $773 million in 2016

Key to growth

Tesla's approach of selling direct to U.S. consumers rather than through independent franchised dealerships, as every other automaker does, has put it at loggerheads with auto-dealership associations, which have pushed through laws banning the practice in some states. Tesla has been blocked from opening outlets in such potentially lucrative markets as Texas, Connecticut and Michigan.

The battle over Tesla's sales model is partly cultural. Electric-car advocates point to surveys that show traditional car dealers have an uneven record at best when it comes to pushing zero-emissions vehicles out of the showroom. "Dealerships have evolved since the last century to be very good at selling products that are familiar to customers," said Eric Cahill, program director at the advocacy group Plug In America. "Electric vehicles are not familiar to customers."

The cars hold benefits and risks unlike those typically associated with cars that run on internal combustion engines. A Tesla sedan can go from zero to 60 mph in less than six seconds, but recharging its battery can take more than an hour—and that's at a high-speed charging station.

Company-owned stores also give Tesla more control over the customer experience. Prices are the same in every store, and there is no haggling.

Auto dealers say that is the problem with such stores: higher prices. "When an auto manufacturer takes on the retailing, distribution and servicing costs that are now carried by the retailer, those costs get baked into the car," said a National Automobile Dealers Association spokesman. "There's no discounting because there would not be independent competing retailers trying to sell that product."

The spokesman added that dealerships have sold plenty of electric vehicles. If sales are modest, it could have to do with consumers' concerns over finding a charging station or the low resale value of some models as battery technology improves. Dealerships worry that if Tesla gets a green light to expand, other automakers will seek to sell directly to New Yorkers too.

The anticompetitive argument has not sat well with a wide range of groups—from the Sierra Club to the Koch brothers' Americans for Prosperity.

"We don't know if [factory-owned stores] are going to raise costs to consumers," said Daniel Crane, a professor at the University of Michigan Law School and a longtime critic of the direct-sale bans. "I'm not advocating the direct-sale model. I'm saying, let it be tested in the market."

Tesla's next chance for a bill allowing it to expand will come in January, when the legislative session begins. Meanwhile, it will soon leave its Chelsea location for a larger, more upscale spot in the Meatpacking District. "It's a hot brand," said David Whiston, an automotive analyst at Morningstar. "But if you want to be a true mass-market automaker, these [sales] restrictions become problematic."

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